Educational Articles

Gambling in Japan?

Dominic B. Silva
| April 12, 2011

Japan, which is reeling from the twin disasters of a 9.0 scale earthquake and a consequent tsunami, and now extensive damage to its nuclear base, has long been rumored to be on the cusp of legalizing gambling and approving land-based casinos with integrated resorts. But for various reasons, including differences in opinion among the political elite, the perceived social problems that accompany gambling activities, and opposition from many local pachinko operators (see below), the government has failed to lift this ban.

There are exemptions of course. In particular, the lottery is allowed, as well as horse racing and betting on sports, as is Pachinko, a pinball slot machine game found in more than 14,000 parlors throughout the country. Pachinko operators circumvent anti-gambling laws by awarding tokens to winners, which are then taken outside the parlor and exchanged for cash. Pachinko is the major form of entertainment in Japan, drawing 15%-20% (relatively affluent) of the nation’s 127 million people, and generating $100 billion a year in income. Industry insiders speculate that this tally is even higher, once illegal pachinko parlors are taken into account. Although the game in immensely popular, alleged ties to organized crime have drawn the ire of regulators. What’s more, while these establishments have created employment, they aren’t considered a selling point to potential tourists and are known to falsify accounts in order to minimize taxable income.

Shrinking tax revenues, together with growing budget requirements, have encouraged leaders in many of the nation’s biggest cities (Tokyo, Yokohama, Okinawa, and Chiba) to push for measures to attract foreigners. In fact, Japan has made tourism one of the main pillars of the country’s growth strategy, aiming to boost hospitality-related revenues to 3% of gross domestic product within the next five years, from 2% in 2010. While the Japanese culture fascinates foreigners, it has proven insufficient at luring tourists in great numbers. Indeed, many are wagering that legalized gambling is the country’s best hope of becoming a major tourist destination.

Japan has established an advisory board, called the Bipartisan Legal Movement for the Promotion of International Tourism, to provide detailed analysis on the matter. While the panel’s study is not complete, we expect it to provide a favorable review of gambling. Moreover, the least costly way to boost tourism and tax receipts is to allow companies to build casino resorts. The legalization of gambling in nearby jurisdictions, Macau, China and Singapore, has proven to be a boon. Moreover, these destinations have started to attract more Japanese citizens and their considerable disposable incomes, much to the chagrin of the Japanese government.

Resorts World Sentosa, built and operated by a Malaysian developer, and Las Vegas Sands’ (LVS) Marina Bay Sands is receiving much of the credit for the record number of tourists that have visited Singapore in 2010. Moreover, the latter’s convention facilities have helped turn this island nation into a hot bed of trade fairs and business meetings. Authorities in Japan will likely study how Singapore handled the legalization of gambling—once its own tragic events of the past few weeks are brought under control. Much like Japan, Singapore was concerned with maintaining social control and stability. Singapore’s solution was stringent background checks on those seeking to build casino resorts. Too, the Southeast Asian country requires its citizens to pay a steep fee to enter casinos, while foreigners can enter for free. This measure is intended to discourage gambling addicts and those with lower income.

Japan’s potential move to legalize gambling has been met with keen interest from a multitude of gaming enterprises eager to plant their flag in this highly lucrative, yet untapped market. Universal Entertainment (UE), a Japanese pachinko giant and the largest shareholder in casino developer Wynn Resorts (WYNN), is a strong proponent of gambling and casinos. The latter owns casino resorts in the United States and China, and should continue to benefit from its association with UE’s billionaire chairman Kazuo Okada. Moreover, Wynn has earned a reputation for conceiving and developing properties that attract tourists in droves.

Another entity eager to get a foothold in Japan is Las Vegas Sands, which has gaming resorts in the United States, China, and Singapore, and much more in the pipeline. An aggressive expansion policy, strengthened by a willingness to take on considerable amounts of debt, has enabled the company to gain access to every major legal gaming market in the world. Representatives of Las Vegas Sands have had discussions with politicians in Japan in recent years, and have disclosed plans to invest up to $10 billion in the market if given the opportunity. Moreover, a proven track record of conceiving and developing architectural marvels augurs well for LVS’ prospects in Japan’s nascent marketplace.

Gaming equipment maker International Game Technology (IGT) is also optimistic about the growth prospects of Asian gaming markets. IGT has established a beachhead for its products in Macau and Singapore, and appears likely to gain material business in Japan, once that nation hopefully resumes business as usual. It offers a wide array of casino-style slot machines, video lottery terminals, as well as electronic and video bingo. Its products include applications for casino management, which provide analytical, predictive, and management tools for maximizing casino operational efficiency. Recently, the company created an Interactive division dedicated to developing online and mobile games, which may prove a hit with Japan’s tech-savvy populace.

While the population of Japan pales in comparison to that of China, the average Japanese individual’s earnings and disposable income are far greater. The legalization of gambling in Japan would be a tremendous boost to the aforementioned companies, enabling them to deliver healthier-than-anticipated growth in the years ahead. Moreover, investors in these companies stand to reap considerable capital gains.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.